Expert Q&A: Food for Thought

Food prices have risen across the globe sparking unrest and protest in some areas. In the U.S., the reaction has not been that acute, but it has changed the way consumers are shopping. Discounters and wholesale clubs are benefiting the most. Meanwhile, grocers are holding their own as Americans eat out less and cook at home more. Retail Traffic spoke with PricewaterhouseCoopers partner Herb Walter about what's driving the trend.

Retail Traffic: What are some of the factors behind the rise in food prices around the globe?

Herb Walter: You've got emerging markets with increasing food demand and the globalization of the food supply chain. You've also got all kinds of domestic factors changing the mix of what consumers are looking for. On the supply side, ethanol has some influence, but it's not just about corn. Petroleum and transportation costs are key. Packaging costs are key. And lastly, certainly the exchange rate of the dollar is also pushing the envelope there.

RT:Is there any credence to the argument that prices are being inflated by speculation by index funds, in addition to the real economic factors?

Walter: I certainly have not seen any indication of that in terms of the financial metrics we've looked at…. The competitive pressures limit the ability of any particular player in the marketplace to be able to do that very effectively. I am not aware of anything that would support that.

RT: Given how low global food stocks are, how long will this situation last?

Walter: I don't have an answer for that, but the price pressures upward are enormous.

RT: Do you think Washington will act to protect consumers from food inflation?

Walter: I think there are incremental changes and I would expect those changes to continue to occur. There is certainly a lot of discussion in the press on farm policy, on ethanol issues and land use being changed for commodities to support energy. All of the right topics are being talked about and we'll all just have to watch as the policy makers work through the different issues.

RT: How long will it take?

Walter: It will certainly not be over several months. It will be over several years that all the pieces of the puzzle will have to be worked out.

RT: For those supermarket chains that have reported their first quarter reports already, the profits seem to be up. Do you think they will continue to benefit from the situation?

Walter: In what we saw so far, when I looked at data through 2007 and the first quarter of 2008, there is a lot of stability in terms of sales, as well as margins at supermarket grocery chains. There are also some shifts in where people are spending their money — maybe grocery stores are benefiting from selling meals that are already prepared, but at the same time, there is discussion of consumers shifting to the club stores.

RT: How have retailers been dealing with the upward pressure on food prices?

Walter: They are collaborating on new initiatives — fewer options, smaller sizes, shifts in ingredients and product formulation. But the simple answer is that most of the pressure that's pushing prices up is outside of the control of manufacturers and retailers.